Monopolistic

Competition
-Mishika Adwani
What is Monopolistic Competition?
❖ The monopolistic competition is actually a structure between
monopoly and perfect competition.
❖ A Monopolistic competition is a market structure in which
firms(business organizations) have many competitors but each one
of them sells a slightly different product.
❖ Unlike monopoly, the monopolistic competition has competition
and unlike perfect competition, the competition is between
products that slightly differ.
❖ A monopolistic competitive market is the one with freedom of entry and
exit, but the firms can differentiate their products.
❖ There is an inelastic demand curve(Inelastic demand is when people buy
about the same amount of a product or service whether the price drops or
rises.). The prices, hence can be changed by the firm.
❖ The firms, as they have the freedom to enter and exit hence can maintain
normal profits in the long term.
Examples

Restaurants Hairdresser Clothing TV programmes

They compete The basis of The basis of There are a lot
on quality and competition is competition is of channels
price. Difference the difference in the difference in which the
in the product is quality of branding and consumer can
the key factor of services. material of choose.
competition. clothes.
Features of
Monopolistic
competition
01. 02.
There are a good number of firms in a There is freedom of entry
Monopolistic competition. and exit.

03. 04.
Firms produce differentiated products. Firms have price inelastic demand
05. 06.
Due to inelastic demand, the firms can Firms make normal profit in the long run
change the prices. and supernormal profit in short run.

07.
Firms are allocatively and productively
inefficient.
Monopolistic competition in
short run
In a short run the firms produce such
products where marginal revenue = marginal
costs to earn economic profit.
In this graph, the MR=MC
Here D is the market demand and AC is
average cost. And here the average cost is less
than the marginal cost to earn economic
profit.
This is at output Q1 and price P1, leading to
supernormal profit.
Monopolistic competition in
long run

If the competitive firms in an industry earn

an economic profit, then other firms will
enter the same industry, which will reduce
the profits of the other firms. More firms will
continue to enter the industry until the firms
are earning only a normal profit.

There is also equilibrium of normal profit in

long run monopolistic competition.
Efficiency of firms in monopolistic competition

1. 2. 3. 4.

Allocative Productive Dynamic X-efficiency OR

inefficiency inefficiency efficiency Competitive
efficiency
Difference with Monopoly and Perfect competition

Difference with Difference with perfect

monopoly competition

In monopolistic competition In Monopolistic competition,

there are no barriers to entry.
Therefore in the long run,
the market will be
competitive, with firms
making normal profit.
firms produce differentiated
products, therefore, they
have inelastic demand.
Thank you !